Oracle's Bad Quarter Is Self-Inflicted

There has been a lot of speculation in the media about the bigger-picture meaning behind the poor financial results Oracle announced Wednesday for its third quarter ended in February.

The most disappointing stat was a 2% drop in new software license and subscription revenue from the year-earlier quarter to $2.3 billion. The license and subscription performance was 4.4% below analyst forecasts and Oracle's worst quarter since a 4.5% shortfall in the quarter ended November 2011. Oracle's stock was punished on Thursday, dropping 9.7% to $32.30, but plenty of other tech stocks were dragged down, with Oracle being seen as an industry bellwether.

The question is this: Is this something that's happening to Oracle, caused by changes in the industry that will impact other tech firms, or is this something that Oracle is doing to itself, in which case only Oracle will suffer? Some of the blame can fall to shifts toward cloud software and changing hardware buying patterns, but media reports were too quick to write off Oracle's operational missteps.

Among the many analyses of what went wrong, a Wall Street Journal story titled "New Rivals Clip Oracle's Wings" captured most of the popular arguments. The article suggests that Oracle's business "is being eroded at the edges by smaller, more focused companies offering newer technology." The new options listed included cloud-based app providers like Salesforce.com and Workday, cloud-based infrastructure providers such as Amazon, and low-cost, open source data-management alternatives including Hadoop and NoSQL databases.

A second big topic, spotlighted by the San Francisco Chronicle among others, was Oracle's hardware slump. Oracle hardware tanked in Q3, with a 23% decline in revenue from the year-earlier period to $671 million. Most analysts were expecting a 10% drop, as Oracle continues its strategy of dropping low-end x86 server products in favor of high-margin products. This quarter, however, Oracle said that customers deferred purchases of its high-end Sun Sparc servers anticipating a next-generation, higher-performance T5 Sparc chip, now set for release next week.

As for those lagging software sales, Oracle CFO Safra Catz blamed the shortfall on the "thousands" of new sales reps Oracle has been hiring in recent months. "What we really saw was the lack of urgency we sometimes see in the sales force, as Q3 deals fall into Q4," Catz told analysts during an earnings conference call. "The problem was largely sales execution, especially with the new reps as they ran out of runway in Q3."

If there's blame to be assigned, the buck stops at the top. Sales are squarely Oracle president Mark Hurd's responsibility.

Everyone seems to have forgotten that Oracle went through a major sales reorganization last year after the company parted ways with one of its most senior sales executives, Keith Block, formerly executive VP of Oracle's North America sales and consulting organizations. There was speculation last summer that Block antagonized Oracle's top brass when instant messages from the executive were shared as evidence during the Oracle-HP Itanium trial. In one message, Block slighted Hurd's leadership, and in another, he said Oracle "bought a dog" when it acquired Sun Microsystems for $7.3 billion.

Responding to press accounts of a "massive sales reorg" last summer, Hurd reassured analysts, "Just to be clear, we are not lining up our sales force; they are already lined up. This is the earliest I'm aware of that we've had territories and comp plans aligned. Everyone has a boss, a territory and a compensation plan."

Apparently Oracle didn't have enough sales people lined up, because they're still hiring "literally thousands" according to Catz. And apparently those compensation plans, which were for the current fiscal year, are not adequately incenting consistent sales performance.

This goes deeper. Just how did Hurd end up as Oracle's president? That decision was made by CEO Larry Ellison, who called Hurd's forced departure from the CEO post at HP "the worst personnel decision since the idiots on the Apple board fired Steve Jobs."

By many accounts, Hurd was not a popular leader within HP, and even before his departure it was becoming clear that the company was not in great shape after the years of cost cutting that he led.

Yet by Ellison's assessment, at the time, "Mark did a brilliant job at HP and I expect he'll do even better at Oracle."

When Hurd was hired, InformationWeek's then editorial director, Bob Evans (now Oracle's senior communications VP), posed the prescient question, "Is Larry Ellison's hiring of former HP CEO Mark Hurd an act of inspired brilliance or an example of emotional overreach that will create more drama and corporate intrigue than even Oracle can stand?"

Perhaps it's too soon to conclude that Hurd's hiring was an emotional overreach. Changing times and technologies surely do have something to do with Oracle's lagging performance. But this is also about execution and leadership, and the bottom line is this: Unless the company turns its performance around, there will surely be more drama and corporate intrigue.

I think Doug is on to something here. Let's face the issue squarely...hiring thousands of sales people while trimming the sales support that makes the complex enterprise sale possible is beyond short-sighted. Moreover, blaming the sales force for the miss is both misguided and narcissistic. The overriding emphasis on new sales people highlights a belief system at odds with the strategy that drove Oracle's phenomenal growth over the last decade. I sincerely hope that Oracle doesn't go the way of HP for the sake of the shareholders and all of the great people in the company.

Hurd was a disaster for HP. Let's never forget this fact. Those of us at HP saw a once great company crash and burn as Hurd led the way slashing and cutting everything to save a dime. His call for "pull it forward" every financial month end was met with what are you doing this month when the next month came around. The guy in connected, ruthless and stupid. A bad combination. He is now doing the same for his buddy at Oracle. Those who don't learn history are bound to repeat it.

Oracle is representative of the dead wood in the enterprise IT space. These players are generally more interested in their own success than that of their customers - their business models are going to implode. The enterprise IT space is full of corporations who think it is their God-given right to raise prices and maintenance fees some astronomical amount every year. They force "clients" (ahem) on an upgrade cycle that meets their financial goals needed to enrich executives and Wall Street. The cost of upgrades and keeping pace for clients is astronomical. The necessary change disciplines, code mods, interface changes, hardware upgrades OS upgrades, etc are astronomical to stay on these cycles.

This is an unsustainable rentier business model that has no long-term proven success. Globally customers are already in arrears huge amounts of money in these upgrade cycles. Soon, they will also reject the maintenance cycles as they are charged higher amounts for maintaining legacy code. Then what? Das ist kaput.

Here's my take as a writer who's covered Oracle, attended their OracleWorld user conferences several times (including the past 3) and has even written for their magazine, Profit: It's a sinking ship. A slowly sinking ship, to be sure--it's too big and mature of a company to just implode--but a sinking ship, nonetheless. I think all of the reasons cited by Doug, and more, are in play: nimble, innovative competitors; shifting market demands; a confusing and unconvincing cloud strategy; questionable decision making; misguided acquisitions; poor execution; lack of focus; etc. But in my opinion, one quality is eroding Oracle's standing in the market more than anything: arrogance. You can see it in Catz' comments, and it's long oozed out of Larry EIlison and trickled down through the organization. And all the pro-Oracle Forbes by-lines in the world by the aforementioned Bob Evans aren't going to change that. (Sorry, Bob, if you're reading this--speaking as a journalist, those pieces, while written with your typical aplomb, just strike me as icky.)

I think a comparison of OracleWorld with rival Salesforce's Dreamforce conference tells me everything I need to know: While Salesforce customers are exuberant cheerleaders for a vendor they've grown to love (Marc Benioff clearly can be arrogant, but he comes off as someone who really cares about his customers' best interests), Oracle customers are zombies in comparison. They come off as resigned to their fates; they're just marking time until they can rid themselves of the burden of Oracle technology and switch to something more nimble and less expensive.

Do you think quotes from the CFO bashing the sales team's performance will improve the morale of those who have to turn this sales deficit around? Another gaffe from Catz, who infamously once crowed about how much profit Oracle reaps from customers. Not terribly sensitive.

Software as a service is the clear No. 1 way enterprises consume cloud. InformationWeek's SaaS Innovation Survey reveals three tips to get the most from SaaS: Make it a popularity contest. Have an escape plan. And remember that identity is the new perimeter.